How much do you pay in taxes when you sell an NFT?
Unfortunately, there isn’t a simple answer to that question. The tax rate that you pay can vary depending on multiple factors such as how long you held your NFT and how the price of your NFT has changed since you originally received it.
We know that trying to navigate all of this can be complicated. So in this guide, we’ll break down everything you need to know about NFT taxes as a buyer, a seller, or a creator. We’ll also walk through four simple strategies that can help you reduce your NFT tax liability.
What is an NFT?
NFT stands for non-fungible token. It’s a fancy term for a unique digital asset that’s verified by blockchain technology.
An NFT may be a JPEG, an MP4, or even a GIF. Each NFT comes with unique IDs and a verified transaction history that shows who minted it, who created it, and who has previously owned it.
In 2021, NFTs started coming into prominence as both a way for creators to get fair compensation for their work and an exciting new type of investment asset. In March of that year, an NFT artwork by the artist Beeple sold for a stunning $69 million.
How are NFTs taxed?
like Ethereum and Bitcoin, NFTs are treated as a form of property for tax purposes. traditional cryptocurrencies
Like other forms of property such as stocks, bonds, real estate, or traditional artwork, you incur capital gains or
when you capital losses dispose of the property, or in this case when you dispose of the NFT. VIDEO What NFT transactions are taxable?
The following transactions are subject to capital gains tax depending on how the price of your crypto-assets has changed since you originally received them.
Buying an NFT with cryptocurrency Selling an NFT for fiat or cryptocurrency Trading an NFT for another NFT
Meanwhile, income earned from primary or secondary NFT sales as a creator is considered ordinary income and taxed accordingly.
What NFT transactions are non-taxable?
The following NFT transactions are considered non-taxable.
Buying an NFT with fiat currency Transferring NFTs between different wallets Donating an NFT What is the tax rate on NFTs?
you will pay on your NFT transactions can vary depending on your specific situation. Let’s run through a few common scenarios. tax rate Collectible tax rate
The IRS treats collectibles as a special class of capital asset subject to its own specific rules. If your NFT is considered a “Collectible”, you will need to pay a maximum tax of 28%, which is slightly higher than the typical long-term capital gains tax rate.
a collectible as: IRS defines Any work of art, Any rug or antique, Any metal or gem, Any stamp or coin, Any alcoholic beverage, or Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m).
For specific NFTs such as digital art, it's reasonable to assume they fall under the "work of art" collectible category.
Similarly, it's reasonable to assume that "trading card-like" NFTs, such as those on the NBA Top Shot platform, will also be treated as collectibles. Physical trading cards have historically been treated the same way.
At this time, it’s not clear whether profile-picture NFTs will be considered collectibles. The conservative approach is to treat them as such and pay the collectible tax rate on long-term sales.
Long-term capital gains rate
Some NFTs do not fall into the “collectibles” category. For example, certain NFTs represent ownership of real-world assets or staking positions in decentralized protocols like Uniswap.
In cases like this, the NFT would likely be taxed at the typical long-term capital gains rate if it is sold after 12 months. Currently, long-term capital gains are capped at 20%.
If you’re not sure what category your NFT falls into, you should reach out to a
with details about your specific situation. tax professional Short-term capital gains rate
If you sell an NFT within 12 months of initially receiving it, you’ll be subject to the short-term capital gains tax rate whether it falls into the collectibles category or not. This can be up to 37% of your gains, depending on your personal income tax bracket.
Income tax rate
As mentioned earlier, revenue from NFT sales is taxed as ordinary income for creators. Like short-term capital gains, ordinary income is taxed from 10-37% at the federal level.
How to report your NFT taxes
Gains and losses from your capital assets (including your NFTs) get reported on IRS Form 8949 and then included with Schedule D.
If the NFTs you are trading are considered to be collectibles, it's recommended that you report all of your collectibles disposals on a separate 8949 from your other capital assets. Add each collectible disposal to 8949 and sum up your total short-term and long-term collectibles trading gains/losses for the year.
Since collectibles are subject to a different tax rate than the rest of your capital assets, filling out a separate 8949 can make it easier for you to accurately report capital gains and losses.
After you've calculated the total gains (or losses) of your long-term collectibles trading, use the sum to complete the
. You will ultimately report these calculations on your Schedule D along with your short-term disposal calculations. 28% Rate Gain Worksheet How can I reduce my NFT taxes?
Wondering how you can reduce your NFT tax liability? Here are 4 strategies that can help.
Hold your NFTs for the long-term
The simplest way to reduce your NFT taxes is to simply hold your NFTs for longer than 12 months. As discussed earlier, the long-term capital gains rate is lower than the short-term capital gains rate.
Dispose of your NFTs in a low-income year
Your tax bracket is determined by your ordinary income in a given year. As a result, many investors choose to dispose of NFTs and cryptocurrencies in years where their annual income is low to minimize their tax liability.
Buy with fiat currency instead of appreciated cryptocurrency
Remember, you incur capital gains based on how much the price of your coins has changed since you originally received them. As a result, investors who’ve held Ethereum for multiple years and seen significant appreciation will likely incur a large tax liability if they use their coins to buy an NFT.
Some NFT marketplaces offer the ability for investors to buy NFTs with fiat currency. This can be advantageous from a tax perspective. Because making purchases with fiat is not considered a disposal of property, investors who choose this method do not incur capital gains.
Tax-loss harvesting with NFTs
If you sell your NFTs at a loss, you can claim a capital loss on your tax return. NFT capital losses can offset capital gains from other property disposals (such as profits from NFT, crypto, and stock sales) and up to $3,000 of income.
For more information, check out our
ultimate guide to tax-loss harvesting . How are NFT gas fees taxed?
Gas fees paid to acquire or dispose of an NFT can be added to your
and/or gross proceeds and potentially reduce your tax liability in a disposal event. cost basis
Gas fees related to acquiring an NFT can be added to your cost basis.
Gas related to selling or disposing of your NFT can be added to your gross proceeds.
How are NFTs in play-to-earn games taxed?
Cryptocurrency games allow players to own and trade in-game assets in the form of NFTs. For example, the popular game
allows players to purchase, breed, trade and battle with NFT avatars known as Axies. Axie Infinity
It’s likely that most transactions involving in-game NFTs will be subject to the same rules as other NFTs. Buying an NFT with cryptocurrency and selling an NFT within a game like Axie Infinity will likely be considered disposal events subject to capital gains tax.
For more information, check out our guide on
. how cryptocurrency games are taxed How are NFT airdrops taxed? I received tokens in an airdrop. How is this taxed?
In 2022, Bored Ape Yacht Club airdropped ApeCoin tokens to holders. In cases like these, recipients recognize ordinary income based on the fair market value of their tokens at the time of the airdrop.
For more information, check out our
. complete guide to airdrop taxes I received an NFT in an airdrop
Receiving an NFT in an airdrop should also be considered ordinary income at the time of receipt. In cases like these, you can estimate your income by looking at the fair market value of NFTs with similar characteristics at the time of the airdrop.
Do you pay sales tax when you buy NFTs?
Some states like Washington and Pennsylvania have added NFTs to their list of digital products subject to the sales tax.
Still, it’s important to remember that the responsibility for withholding sales tax falls on those who create and sell NFTs as a business — not on other individuals who buy, sell, and trade NFTs.
In the past, the Supreme Court has ruled that businesses who conduct more than 200 transactions or make $100,000 in sales in a given state are subject to sales tax. It’s reasonable to assume these same rules will apply to NFT creators who meet the same threshold in states where NFT sales tax has been introduced.
However, it’s difficult for NFT creators to abide by these rules. At this time, NFT marketplaces like OpenSea and Rarible don’t collect addresses from users. As a result, trying to determine the states of residence for buyers can be almost impossible.
If you’re a creator who’s met the threshold for sales tax on NFTs, you should reach out to your tax professional on how to stay compliant with state rules and regulations.
How to calculate taxes on your NFT transactions in minutes
If you have multiple NFT transactions in a tax year, manually calculating your NFT tax liability can get complicated. Luckily, there’s an easier way.
, you can calculate taxes on your NFT transactions in minutes. Here’s how the process works. NFT tax software 1. Find the public wallet address for your Ethereum wallet.
2. Copy and paste your Ethereum wallet address into CoinLedger. Your complete transaction history will be pulled directly from the blockchain, including any NFT transactions you may have.
3. You’ll be able to view all of your NFT transactions, as well as any NFTs that you currently hold, on your CoinLedger dashboard.
And that’s it! Once you import your transaction history from other wallets and exchanges, you’ll be able to generate a complete
with the click of a button. tax report Looking for an easy way to track your NFT taxes?
Trying to report your NFT taxes manually can be difficult. With
like CoinLedger, the process has never been simpler. The platform integrates with the Ethereum blockchain and NFT marketplaces like crypto tax software so you can file your taxes in minutes. OpenSea
Get started with a completely
today. free preview report Frequently asked questions
Let’s summarize what we’ve discussed so far by answering a few commonly asked questions about NFT taxes.
Are NFTs taxable?
Yes. Like other crypto-assets, NFTs are considered property and can be subject to both capital gains and income tax.
How are NFT sales taxed?
When you sell an NFT, you incur a capital gain or loss depending on how the price of your NFT has changed since you originally received it.
Do I have to report NFTs on my tax return?
Yes. NFT disposals should be reported on
of your tax return. Form 8949 Are NFT losses tax deductible?
Capital losses from NFTs can offset capital gains and reduce your tax liability for the year.